The US Federal Reserve has extended its selling of short-term bonds – a plan dubbed Operation Twist – in a bid to bolster the United States’ slowing economic recovery.

The central bank held back from more aggressive actions – including a much-speculated about third round of asset purchases, known as QE3 – that would expand the Fed’s balance sheet, but signalled it was ready to do more if necessary.

“If we are not seeing sustained improvement in the labour market, that would require additional action," Fed chairman
Ben Bernanke
said. “We still do have considerable scope to do more and we are prepared to do more."

The Fed retained its guidance that rates were likely to stay near zero until at least late 2014.

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Expressing concern about strains in global financial markets emanating from Europe, the US Fed said after a two-day meeting on Wednesday that it was extending Operation Twist with the purchase of $US267 billion in longer-dated securities this year.

The first phase of the program was scheduled to end at the end of the month.

“This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative," the Fed said in its post-meeting statement.

Under the plans announced on Wednesday, the Fed will purchase Treasury securities with remaining maturities of six to 30 years and to sell or redeem Treasury securities with remaining maturities of about three years or less in equal amounts.

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The Fed also stuck to its characterisation of the US economy as “expanding moderately," but said growth in employment has slowed in recent months. It also expressed worries about weaker consumer spending.

It cut its estimates for US economic growth this year to a range of 1.9 to 2.4 per cent, down from an April forecast of 2.4 to 2.9 per cent. It also reduced its economic forecasts for 2013 and 2014.

Immediately after the Fed announcement the US dollar dipped against the euro in volatile trade. The euro, which had initially traded lower, rebounded 0.2 per cent to $US1.2706. US stocks seesawed, with the benchmark S&P 500 index closing down slightly, while prices for most government bonds slipped.

“On second look, maybe the market is thinking they are flagging some deflationary risks that we’re seeing as well as having left the door wide open to another round of QE if conditions get worse."

Wall Street’s top bond firms still see a 50 per cent chance that the Fed will launch a third round of quantitative easing.

The decision to extend Operation Twist follows the release of weaker-than-expected economic reports that further cast into doubt the strength of the US economic recovery.

First-quarter US gross domestic product was recently revised lower to a 1.9 per cent annual rate from 2.2 per cent, while the May labour force report showed only 69,000 new jobs, far short of the 150,000 new positions to keep up with population growth and new job entrants. The unemployment rate rose to 8.2 per cent, keeping it mired above 8 per cent for 40 consecutive months.

Heading into the Fed’s meeting this week, economists were closely divided on whether the central bank would decide more monetary stimulus was needed. The Fed has held overnight interest rates near zero since December 2008 and has bought $US2.3 trillion in mortgage and government bonds in a further effort to help the economy.

But the decision to extend Operation Twist was not unanimous. Richmond Fed president Jeffrey Lacker, who has dissented at every meeting this year, voted against the action, saying he opposed the extension of Twist.

Last year, it launched “Operation Twist," in which the Fed sold bonds with maturities of three years or less and bought $US400 billion of securities with maturities of six years and longer to push longer-term interest rates lower.

Fed vice chair Janet Yellen earlier this month had argued further action might make sense to “insure" against downside risks given a sharp slowdown in hiring by US employers and an escalating debt crisis in Europe.

However, Dr Bernanke declined to tip his hand in testimony to Congress. A Reuters poll on June 8 put the chances of an extension of Operation Twist at 42.5 per cent.

Even though Greek voters at the weekend supported candidates who back taking painful steps to stay in the euro currency union, Europe’s debt crisis remains a threat to the global economy and many central banks are warily eyeing economic conditions.

Minutes from meetings of the Bank of Japan and Bank of England released on Wednesday suggest officials are poised to ease policy again. China cut benchmark rates on June 7, while the European Central Bank could take action at its July 5 meeting.